‘Too many things wrong.’ Critics push to end KY tobacco co-op, give money to farmers
Tobacco was king of Kentucky agriculture for generations, but with that reign over, the future is uncertain for an organization that once had a key role in the industry but has struggled to remain relevant in the new landscape.
The Burley Tobacco Growers Cooperative Association is being challenged from two directions.
In one effort, an attorney representing tobacco producers is pushing to dissolve the Lexington-based co-op through a vote by members. The plan calls for dividing the co-op’s $30 million in assets among growers.
The co-op has lost money on tobacco sales in recent years and its debt has increased.
That has created a concern the co-op will dwindle and die with no payout to farmers, said Nathan Billings, a Lexington attorney handling the dissolution effort.
It would be better to dissolve the co-op and pay farmers before it loses more value, Billings argues.
“The financial writing’s on the wall,” he said.
The co-op covers Kentucky, Ohio, Missouri, Indiana and West Virginia, but most of its members are in Kentucky.
On another front, attorneys representing three members filed a lawsuit this week seeking a court order to dissolve the co-op. It is a class-action complaint; if it succeeds the co-op’s assets would be divided among all members.
The lawsuit argues that the co-op is wasting its assets, is not functioning as required, hasn’t communicated well with members and has been more focused on preserving the board than serving members.
The co-op has acted illegally and its continued existence “will be illegal in that it no longer serves a purpose,” the complaint alleges.
Lexington attorney Robert E. Maclin III, who sued the co-op to force an earlier payout of more than $100 million to nearly 200,000 people, is one of the attorneys handling that lawsuit.
Billings announced Friday that he had given the co-op petitions signed by more than 100 members requesting a special meeting to vote on dissolving the organization. That was more than double the 10 percent of members required, he said.
As a result, the co-op will have to schedule the meeting, notify members and send them proxy ballots and a copy of the dissolution plan, Billings said.
Greg Craddock, a Metcalfe County farmer quoted in Billings’ news release, said the co-op has lot millions of dollars and not communicated well with members.
“We want the money distributed out to us, before it’s all gone!” Craddock said.
It would require a vote of two-thirds of those voting in person or by proxy to dissolve the organization.
Billings said the co-op’s attorney told him that if enough members vote to dissolve the organization, there would be about 3,300 people eligible for a share of the assets left after paying its obligations.
There is division on the co-op board over the issue.
Al Pedigo, who heads the board, does not support dissolving the organization.
Pedigo said that despite some problems, the organization still provides value to members.
The co-op started a program to help producers with labor, for instance, and has played a key role in representing growers’ interests to tobacco companies, Pedigo said.
“I think that’s been helpful,” he said. “It’s important that we have a group do that.”
Pedigo said he is working on proposals aimed at improving operations and the continued viability of the co-op.
He said he could not release details before the Feb. 5 board meeting, but hopes the changes will convince farmers the co-op is worth keeping.
Roger Quarles, a Scott County farmer who has been on the board since 1997 and is a former co-op president, supports the move to dissolve the century-old organization.
“There is no value being produced to send to members,” Quarles said.
If the co-op ends by a vote of the members or as a result of the lawsuit, it will be a final chapter of sorts for a system that once dominated agriculture in Kentucky.
The co-op was formed in the early 1920s as a marketing organization, but for more than 60 years it was a part of the system put in place by the federal government in the Depression to help prop up the farm economy.
The system combined guaranteed minimum payments, called price supports, for farmers’ tobacco, and quotas, or limits on how many pounds they could grow, to keep down over-production.
The program helped sustain tens of thousands of farm families in Kentucky and other tobacco-growing states.
The burley co-op maintained the pool of leaf that tobacco companies didn’t buy, and then sold it later.
In the face of growing opposition to smoking, the federal government ended the price-support program in 2004, buying out farmers’ quotas and leaving them to seek contracts from cigarette makers to sell tobacco.
The fight over the future of the co-op comes against the backdrop of a decline in the state’s tobacco industry.
Many farmers quit growing tobacco when the price-support program ended, and those who continued have faced a range of challenges, including stagnant prices that haven’t kept pace with rising production costs, continued decline in demand and competition from cheaper leaf grown overseas.
“It’s just harder and harder for farmers to grow a profitable crop,” Pedigo said.
In 2017, Kentucky farmers grew 173 million pounds of tobacco on just over 2,600 farms, down from 497.8 million pounds on 46,850 farms in 1997, before the end of the support program.
The market value of Kentucky tobacco totaled $351 million in 2017, far below the $828 million from 20 years earlier, according to the U.S. Department of Agriculture.
After the support system ended, the co-op started a program to buy tobacco from some members and re-sell it.
It hasn’t worked well in recent years.
The co-op lost an average of $436,000 a year buying and selling tobacco from 2013 to 2018, and while its financial health remained “relatively strong” in 2018, its net worth had gone down $2.5 million from 2014, according to an analysis by the Kentucky Center for Agriculture and Rural Development (KCARD) and The Center for Cooperatives at the College of Food, Agricultural and Environmental Sciences.
The study also found that the co-op had been able to sell little of the tobacco it had bought from members and that it had gone from having no debt in operating loans in 2013 to $13.5 million in 2018.
“That’s not sustainable,” Billings said.
Pedigo said the co-op began buying burley from members with the good intention of providing them a market, but it hasn’t worked out because of corporate consolidation.
The co-op also did not offer contracts to all members, so the program wasn’t benefiting all of them.
Quarles said the co-op had some early success marketing members’ tobacco, but larger tobacco companies have since bought out many independent companies, leaving the co-op with fewer places to sell leaf.
There is little opportunity left for the co-op to sell the tobacco it buys from members, and its losses on that program will likely continue, he said.
The cop-has dipped its toe into the hemp market, but Quarles said it is likely to lose money on that venture.
The KCARD review cited other problems with the co-op as well, including a lack of communication with members and not having a system in place to pay equity benefits to members.
Some farmers said in a survey that they felt the co-op was not taking a leadership role in issues affecting tobacco growers. Some also said they felt board members made decisions to preserve their positions.
Pedigo said the board is moving to address the issues identified in the review.
Quarles said the board has been too slow to deal with those issues. He’s not convinced there is a way forward for the organization.
“There’s just too many things wrong here that there’s been no effort to correct,” he said. “I think the co-op’s day is gone.”
This story was originally published January 30, 2020 at 2:04 PM.
